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Olympics

From an economic perspective, hosting the Olympic Games is often considered a poor investment. They are frequently touted as catalysts for explosive job, infrastructure, and economic growth. These results, however, are generally short lived: increased employment in the hospitality and service sectors only lasts until the end of the Games. Rapidly constructed infrastructure often falls into disuse, leaving vacant housing and sports venues. Economic growth fueled by tourism quickly fades after the end of the Games, returning cities to their pre-Olympic state, and often saddled with exceptionally large amounts of debt.

The 2016 Rio de Janeiro Olympics provides a typical example. In its Olympic bid, the Rio government estimated the costs of the Olympics to be approximately $3 billion. However, at the start of the Games this cost had increased to approximately $4.6 billion, ballooning to a final tally of over $13 billion after the Games had concluded, according to an article in popular statistics website FiveThirtyEight.com. Frequently, winter Olympics are even more expensive than their summer counterparts, with the 2014 Sochi Games in Russia resulting in a total price tag of around $50 billion, according to the Washington Post. The Pyeongchang Olympics, for its part, has a stated cost of around $12.9 billion, compared to its estimated cost of $7 billion – $8 billion. With such a high up-front cost, South Korea must consider the potential social, diplomatic, and economic benefits it may receive to offset the large amounts of debt hosting the Olympic Games in Pyeongchang is likely to incur.

From a social standpoint, many citizens in Korea, and Pyeongchang specifically, support hosting the Games, with 92.4 % considering it a “good thing,” according to several public opinion polls tabulated by the International Olympic Committee (IOC) in its Olympic Games Impact Study. For many, hosting the Olympic games is a point of pride, and similarly contributes to the host city and country’s international reputation. Due to the popularity of the Olympics (with approximately 3.6 billion people watching some part of the Rio Games — almost half of the world’s population), international recognition is unavoidable, and often the Games provide a cultural and societal value beyond that quantifiable by objective economic analysis.

Currently, the Korean peninsula is facing a time of increasingly tense international relations, exacerbated by the development of nuclear weapons in North Korea and threats of conflict between North Korea and the United States. A major hope of South Korea’s President Moon Jae-in is that the 2018 Games will help ease these tensions, echoing the “ping pong diplomacy” policy seen in the 1970s, in which table tennis players competed in Communist China and helped create the opportunity for President Nixon to visit the country in 1972, which had largely shunned interaction with the United States. This move towards unification, whether truly a representation of a unifying sentiment or merely a symbol of diplomacy, is epitomized by the decision for the North and South Korean teams to march together for the first time since 2007, following discussions in the Demilitarized Zone bordering the countries. The gesture of marching together in this Olympic Games, however, is particularly significant given the current diplomatic climate. Increased militarization and development of nuclear weapons in North Korea, as well as comments from both Kim Jong Un and President Trump, have likely increased tensions between North Korea and the USA. From a practical standpoint, the addition of an “Olympic Truce” in the 2018 Games ensures athletes’ safe travel, providing a conduit for athletes to leave North Korean.

Although the economic benefit of the Games tends to be overstated, it is not absent, as countries often experience an economic boost following a winning bid. A major challenge for Pyeongchang in generating economic growth will be in eliminating runaway costs, as was seen in the Sochi Games and its $50 billion price tag. In fact, the Hyundai Research Institute estimates that the Games will add over $61 billion into the South Korean economy — a $52 billion net economic benefit. It is estimated that over 2.6 million people (both local residents and visitors) will attend events associated with the Games, driving economic growth in a variety of sectors: from construction to hospitality and food service. A common issue to Olympic host cities is vacancy and a return to the former employment rate following the conclusion of the Games. In the case of Pyeongchang, however, city officials believe that they will be able to utilize the buildings constructed for the Games, coupled with the international recognition the Gangwon province will receive, in order to drive long-term growth in the area’s currently underdeveloped tourism industry. In this way, they hope to avoid the common pitfall of explosive growth followed by excess capacity and a return to the prior unemployment rate that appears to be endemic in hosting the Olympic Games.

Although the Games will likely result in a significant economic burden for South Korea in the long-run, there are additional non-quantifiable factors that could contribute to its ultimate success. It will assuredly increase the area’s international recognition, due to the worldwide popularity of the Olympic Games. It has the potential to catalyze discussions between the North and South, which could result in de-escalation at a time when nuclear tensions between North Korea and the rest of the world have never been higher. And it is certainly possible that Pyeongchang will be able to accomplish the unlikely, and utilize the Games to establish long-term, sustainable growth in the Gangwon region. With this in mind, the ultimate success of the Pyeongchang Olympics will not be determined by two weeks in February, but rather will take decades to be evaluated.

Traditionally considered a catalyst for regeneration and growth, the Olympic Games certainly bring prestige and media attention to the host country. The conventional argument is that this increased visibility benefits the host nation by attracting additional foreign investment, creating jobs, and boosting tourism. However, preparing to host the Games in the first place is a massive undertaking that first requires considerable capital investment in upgraded infrastructure, athletic facilities, housing, telecommunications, security, and sanitation, as well as covering other operational expenses during the Games themselves.

For London, these expenditures have totaled upwards of $14.5 billion, which well exceed its initial $5 billion estimate. The phenomenon of runaway costs is not atypical for host countries historically, however. For the Olympics in Athens and Beijing, preliminary estimates amounted to $1.6 billion in both cases, but ended up costing $16 billion and $40 billion, respectively. Unfortunately for London, the years leading up to the 2012 Games have been marred by constant upward revisions on cost estimates, of which the Olympic Park’s Aquatics Center is a perfect example. Originally budgeted at $118 million, the facility ended up costing $434 million. Despite this, the London Games actually proved to be a leaner Olympic Games than in years past.

Given the tumultuous economic climate in which England finds itself, it is unsurprising that the London Games lacked much of the extravagance that defined the Games in Beijing. Facing its second recession in four years, faltering consumer and investor confidence, and a seemingly imminent eurozone crisis, England is desperate for an economic boost. Manufacturing has fallen at its fastest rate in more than three years, and the economy has contracted by 0.7% in just a few months, suggesting even greater hardships are still to come.

To make matters worse for England, due to the global economic downturn, private investors largely reneged on their commitments to fund various projects related to the Games. Lacking a sufficient pool of private financing, England’s government was forced to absorb even greater expenditures than it initially anticipated. By contributing to England’s rising budget deficit, such additional expenses have only exacerbated England’s current dismal fiscal situation.

To be fair, funding the Olympic Games always places a strenuous burden on the government budget, irrespective of the current economic conditions. This harsh reality is nowhere more obvious than in Montreal during the 1976 Olympic Games, where severe cost overruns necessitated the introduction of a tobacco tax to help pay off its debt. While London has not yet reached this extreme, the substantial unexpected costs incurred challenges the economic viability of hosting the Games in the first place.

Although the majority of costs incurred by England from hosting the Games consist of direct expenditures, a more subtle but equally important component quantifies what the country is sacrificing in order to host the Games. By funding Olympic endeavors, England’s scarce capital is diverted from potentially more productive uses. As a result, hosting the Olympics can conceivably translate into slower rates of economic growth than what could otherwise be achieved. This opportunity cost, as it is referred to in economics terms, continues even after the Games end, as the projects that would have been undertaken with these public funds still do not receive the proper amounts of resources to be completed.

Over the last two decades, the economic impact of hosting the Games on the host country has been quite mixed. Although Barcelona in 1992 and Atlanta in 1996 enjoyed continuous and meaningful economic growth following the Olympics, the last three host nations—Sydney in 2000, Athens in 2004 and Beijing in 2008—all failed to secure sufficient long-term benefits from the sporting event. In each of the three most recent cases, it became increasingly apparent following the Games that the anticipated future revenues failed to materialize and thus did not justify the large upfront costs.

Having established the source of both the direct and indirect costs of hosting, one can now consider the potential for long-term benefits in order to ultimately decide whether sustaining the costs is justified. The primary factor underlying whether the Olympics will deliver future benefits or become an economic flop is the ability to smoothly transition from the Olympics to normal operations. For host cities like Athens that failed to achieve this, a rather lackluster residual legacy persisted following the Games. The current state of Athens’ athletic facilities is a constant reminder of the lofty expectations that never came to fruition. Because its infrastructure was constructed specifically for the Games without regard for post-Games integration, the overcapacity that has since ensued has led to severe underutilization of 21 of Athens’ 22 once world-class facilities. Most of its stadiums are in a state of disrepair, its Olympic village is a ghost town, and the government cannot afford the 60 million euros per year necessary to operate and maintain its facilities. By contrast, Salt Lake City, Utah, the host of the 2002 Winter Olympic Games, continued to enjoy higher volumes of skiers in future years following the games, because of its ability to find long term public uses for its Olympic venues.

London, now acutely aware of this issue, is determined to learn from Athens’ mistakes in order to ensure long-term feasibility and optimize the economic legacy of the Olympics. In an unprecedented move, the UK established a committee in 2009 to focus exclusively on post-Olympics development. London has designed venues that are more suitable for hosting events long after the Olympic Games have passed, by concentrating on portability and adaptability. For instance, its main stadium, which seats 80,000 people, has an upper tier that will be dismantled after the two-week sporting event. By relying on temporary as opposed to permanent installations, London will likely avoid the problems of excess capacity faced by Sydney, Beijing, and most prominently, Athens. Now with a more manageable capacity of 25,000, the core stadium becomes more usable for hosting smaller sporting events, concerts, and commercial events in the future.

Along similar lines, ensuring that any and all benefits are distributed among the city’s population is an important consideration. The 2012 Olympics has been coined “The Regeneration Games,” because of London’s mission to achieve urban renewal in the previously neglected neighborhoods of East London. Featuring 250 acres of open space, state-of-the-art athletic facilities, and the Athletes’ village, the newly built 500-acre Olympic Park in East London embodies the transformation of the urban landscape. To facilitate the integration of the eastern and western parts of the city, London spent billions of dollars on a new rail line that will connect the traditionally affluent West London with the poorer Eastern half. Additionally, developers have already opened the largest urban shopping center in Europe in East London, as well as various commercial spaces, housing, schools, libraries, and community centers.

Throughout the entire process, though, London must be wary of simply attracting wealthy outsiders. Instead, London should seek to raise the standard of living of East London’s poorer constituents by stressing affordability. For this reason, the city of London also has plans to build over 11,000 affordable homes in the region, in addition to its plans to convert the Athletes’ Village into 2,800 affordable apartments following the Games. For these plans to succeed, the government must actively promote continued regeneration in the region even after the Games are completed and the impetus has weakened, through encouraging job creation, improved health, and steady economic development.

Sustaining meaningful, long-lasting economic growth is also largely contingent upon maintaining increased levels of foreign investment beyond the short-term outlook of the Games. To do so, London has made an effort to attract increasing foreign capital as well as foreign direct investment—both public and private—by targeting companies based in China, India, and the United States. In fact, London has plans to host exhibitions and conferences designated to increase visibility and promote British businesses abroad. Its active promotion has already begun to pay dividends, as foreign companies, including Jaguar, Nissan, and a transportation contractor have recently announced over $8 billion in investment over the near term, including a $7 billion contract to build 92 inner-city trains.